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PETITIONER: MENTAL BOX CO. OF INDIA LTD.

       Vs.

RESPONDENT: THEIR WORKMEN

DATE OF JUDGMENT: 20/08/1968

BENCH: SHELAT, J.M. BENCH: SHELAT, J.M. VAIDYIALINGAM, C.A.

CITATION:  1969 AIR  612            1969 SCR  (1) 750  CITATOR INFO :  R          1974 SC 136  (9)  R          1971 SC1821  (8,9)  R          1972 SC 299  (12)  F          1972 SC 471  (24,27,28,29,30)  R          1972 SC2195  (16)  E          1975 SC 756  (2,3)  E&R        1981 SC2105  (9,20,21,42)  RF         1986 SC 484  (17,26)  F          1986 SC1746  (6)  RF         1986 SC1938  (11,15,16)  RF         1987 SC1143  (4)

ACT: Bonus  Acr,  1965  ss. 4,  6,  7-Scope   of-Computation   of bonus-Principles   for  deduction  from  gross  profits   on account  of depreciation, development rebate, and  estimated liability  for  gratuity-Treatment of  interest  on  capital reserve attributable to revaluation of assets-Principles for determining  allowance  for direct taxes that  employer  "is liable to pay".

HEADNOTE: In a dispute between the appellant and its workmen  relating to the computation of bonus under the Payment of Bonus  Act, 1965, the Company contended that the available surplus  came to  Rs.  49.96 lakhs sixty pet cent  of which,  namely,  Rs. 29.98  lakhs  was  the  allocable  surplus.  The   employees disputed  the  computation  claiming that  the  Company  had wrongly reduced the gross profits and the available  surplus and contended, inter alia, that certain amounts deducted  on account   of provisions for gratuity and for doubtful  debts should  be  added  back;  they  challenged  a  deduction  of interest on reserves on the ground that the capital  reserve was  artificially  arrived at by a mere revaluation  of  the company’s  fixed  assets  as  on April  1,  1956;  and  also disputed the figures of depreciation, development rebate and direct taxes deducted by the company  while working out  the available surplus. The  Unions disputed the amount of Rs.  28.82  lakhs  worked out by the Company’s auditors as depreciation in  accordance with  the Income-tax Act, 1961 on the ground (1) that  there was  no evidence  that  the amount of depreciation  came  to

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Rs.  28.82  lakhs; and (2) that since the  profit  and  loss account  mentioned  Rs. 23.48 lakhs  as  depreciation,   the Company could only claim that amount. In its award the Tribunal allowed Rs. 23.48 lakhs instead of Its.  28.82  lakhs claimed by the company  as  depreciation. Similarly  it  allowed only Rs. 7 lakhs instead of  Rs.  8.8 lakhs  claimed  by the company as development  rebate.   The Tribunal  held  that the amount of Rs. 18.38  lakhs  claimed under the head of gratuity was not a reserve but a provision and therefore, was not liable to be added back, but it  held that  the  company could deduct only about Rs. 10  lakhs  as also   Rs.   1.31   lakhs  and Rs.  87,000/-  actually  paid during  the year to employees who retired during  that  year and  added  back  the balance of Rs. 6 lakhs  to  the  gross profits.   Except for these amounts, the  Tribunal  accepted the rest of the company’s computation.   Both the Unions and the   Company  obtained  special  leave  and  fled   appeals challenging  the  correctness of the Tribunal’s  award.   In their  appeal it was also contended by the Unions  that  the Tribunal had wrongly allowed a deduction of Rs. 145 lakhs as direct  taxes under sec. 6(c); all that the  employer  could deduct was direct taxes which he "is liable to pay" for  the accounting year in respect of "his income, profits and gains during  that  year",  i.e., the  employer   is  entitled  to deduct  only  his  actual tax  liability.   Such  liability. therefore,  has  to  be worked out in  accordance  with  the provisions of the Income-tax Act and other relevant Acts  by first  arriving  at  the actual taxable  income,  gains  and profits under those Acts and then compute the taxes at rates provided by them for that particular accounting year. 751 HELD:The  appellant.company contentions  on  the   questions of  development rebate and the provisions for gratuity  must be  upheld; the amount of depreciation must  be  ascertained afresh by the Tribunal after giving the parties  opportunity to  lead  such  evidence as they  desired.   The’  workmen’s appeal must be dismissed. (1)  The depreciation deducted in the   expenditure   column in  the Profit and Loss Account was the depreciation  worked out under s. 205(2) of the Companies Act, but under  section 6  of the Bonus Act, the Company is entitled to deduct  from its  gross  profits depreciation  admissible  under  Section 32(1) of the. Income-tax Act, i.e., such percentage on  the’ written  down  value  as may, in the case  of  each  of  the classes  of assets, be prescribed.  It was for  this  reason that  Rs.  23.48  lakhs were shown as  depreciation  in  the Profit  and  Loss  Account  by  the  Company  while  in  the computation for bonus the company claimed Rs.  28.82   lakhs as. depreciation. [755 H--756 B] Since the Company claimed the deduction of depreciation, the burden  of proof that the amount claimed was  in  accordance with the Income-tax Act was on the Company and that   burden the company must discharge once its figures were challenged. It  was  not  sufficient for it  to  produce  its  auditors’ certificates.   The  question as to the  correct  amount  of depreciation  must therefore go back to the Tribunal  for  a further  decision. The Tribunal must give an opportunity  to the   Company  to  prove  its  claim  for  depreciation   by reasonable proof and to the Unions to test such, evidence by cross-examination or otherwise. [757 D] Khandesh  Spg. & Wvg. Mills Co. Ltd. v. The  Rashtnya  Girni Kamgar  Sangh, [1960] 2 S.C.R. 841, 847, Petlad  Turkey  Red Dye  Works Ltd. v. Dyes & Chemical Workers’ Union  [1960]  2 S.C.R. 906, 909, referred to. (2)  Under s. 6(b) of the Bonus Act the Company is  entitled

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to deduct out of the gross profits arrived at under s. 4 the whole of the development rebate admissible under the Income- tax Act, i.e., the amount, 75 per cent of which comes to Rs. 7  lakhs in the present case.  The Tribunal was in error  in mixing  up  the  development rebate  reserve  to  which  the Company  had  to appropriate Rs. 7 lakhs in the  Profit  and Loss  Account and the development rebate of Rs.  8.87  lakhs allowable to it under s. 6. of the Act.  There was therefore no justification for the Tribunal to allow’ Rs. 7 lakhs only instead of Rs. 8.87 lakhs as development rebate. [759D-F] (3) An estimated liability under gratuity schemes as in  the present  case, even if it amounts to a contingent  liability and  is  not a debt under the Wealth Tax  Act,  if  properly ascertainable and its present value is fairly discounted, is deductible  from  the  gross receipts  while  preparing  the Profit  and  Loss  Account.   This  is  in  accordance  with accepted  principles  of commercial practice and is also the position   under  the Income-tax Act. There is  no  rule  or direction in the Bonus Act which prohibits such  a practice. [766 C; 767 D] The  Tribunal in allowing Rs. 10 lakhs out of the  estimated liability  of  Rs.  16 lakhs  impliedly  accepted  the  same principle  but allowed only Rs. 10 lakhs because it  thought the  estimate  to be excessive.  This was not  done  on  the ground  that the estimate of Rs. 16 lakhs was not  warranted on any valuation.  In the absence of any challenge as to the correctness  of  the  valuation and in the  absence  of  any challenge  that  such iiability cannot be estimated  on  any fair standard. the Tribunal ought to have allowed the  whole of  Rs.  16 lakhs to be deducted while arriving at  the  net profits in the Profit and Loss Account. [767 E] 752 Calcutta  Company  Ltd.  v.C.I.T.,  [1960]  1  S.C.R.   185; Commissioner  Wealth  Tax v. Standard Vacuum Oil  Co.  Ltd., [1966]  2  S.C.R. 327; Kesoram Industries and  Cotton  Mills Ltd. v.C.W.T., [1966] 2 S.C.R. 688; Standard Mills Co.  Ltd. v. Commissioner of Income Tax, [1967] 1 S.C.R. 768; Southern Railway  of  Peru  Ltd. v. Owen, [1957]  A.C.  334  and  San Insurance Office v. Clark, [1912] A.C. 443; referred to. (4)  There  was  no justification for  the  contention  that revaluation  of company’s assets in 1956 was fictitious  and that  the   difference  of  Rs. 57 lakhs  was  a  mere  hook adjustment  and did not add to the wealth of the company  so that no deduction by way of interest was permissible on such an artificial amount. [767 H] In  the  present case the revaluation was made as  early  as 1956 and did not appear to have been objected to at any time either  by  the  Company’s  auditors  or  by  any  one  else concerned   with  the  Company’s  management.   It   cannot, therefore,  be  legitimately said that it was done  for  any oblique  purpose,  much  less  with a  view  to  defeat  the labour’s  claim to bonus.  It is true that such  revaluation does  not bring in any tangible additional amount  into  the company’s  coffers  which it can use for its  business.  But under sec. 211 of the Companies Act, every balance-sheet  of a  company  must give a true and fair view of the  state  of affairs of the company as at the  end of the financial year. Sch.  VI to the Companies Act also provides that where  sums have  been  written off on a reduction of capital or  a  re- valuation of -assets, the balance sheet, subsequent to  such reduction  or  revaluation  must show  the  reduced  or  the increased  figures  as  the  case may  be.  Apart  from  the provisions  of  the  Companies  Act,  it  is  a   recognised principle of accountancy to transfer the increased value  of assets on revaluation to a capital reserve account.  Such an

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increased figure is an unrealised accretion in the value  of a fixed asset.  The fact that such an increased figure  does not  actually bring in any additional amount to the  company does  not make the capital reserve any the less  a  reserve. [768 C-G] The Tribunal was therefore right in accepting the figure  of Rs.  57 lakhs and deducting interest thereon from the  gross profits. (5) Bonus being payable within eight months after the  close of  the accounting year in cases where there is  no  dispute pending  before  an  authority under s. 22  of  the  Act  as provided  by  s. 19, it is hardly possible, except  in  rare cases,  that assessment under the Income-tax Act  and  other such  Acts  would be completed by the time bonus has  to  be paid.  Therefore, the Tribunal would not have before it  the taxable  income  assessed by the Income-tax and  other  such officers.  If the Union’s contention were to he right, there would be two or more parallel authorities working under  the Bonus  Act  and the Income-tax Act and other such  Acts  who would  have  to assess taxable income and  the  tax  payable them,  before all of whom the employer would have  to  prove his taxable income. In each bonus dispute, the Tribunal, not equipped   with  the  detailed knowledge of all  such  Acts, would have to undertake an enquiry into various  deductions, rebates, reliefs, etc. claimable by the employer under those Acts.   The  fact that payment of bonus cannot  broke  delay without  causing hardship to labour would seem  to  militate against the possibility of such prolonged enquiries. [774 E- 775 A] An examination of the provisions of the Bonus Act shows that the  ’Tribunal must estimate the amount of direct  taxes  on the  balance of gross profits as worked out under ss. 4  and 6,  but  without  deducting the bonus,  then  work  out  the quantum  of taxes thereon at rates applicable  ,during  that year to the income, gains and  profits of the  employer  and 753 after deducting the amount of taxes so worked out arrive  at the  available surplus. Section 6(c) being subject to  s.  7 the  computation has to be done without taking into  account the items specified in s. 7(a) and in the manner  prescribed by   the   remaining   clauses  of   that   section.    This interpretation is commendable because; (1) it is  consistent with  the words "is liable to pay" in s. 6(c), (2) it is  in harmony  with the provisions of ss. 4 and 6 and Sch. H,  and (3)  it  is  consistent with  the  intention  of  Parliament apparent from the scheme of computation of available surplus in the Act.  Furthermore, if Parliament intended to  make  a departure  from the rule laid down by courts  and  tribunals that  the bonus amount should be calculated after  provision for  tax  was  made and not before, it would  have  made  an express provision to that effect either in the Act or in the Schedules. [776 B-D; F-G] Associated  Cement  Companies Ltd. v.  The  Workmen,  [1959] S.C.R. 925 at  974;  Crompton Parkinson (Works) Private Ltd. v.   Its  Workmen [1959] Supp. 2 S.C.R.  936;  and   Workmen o!  India  Explosives Ltd. India Explosives Ltd.,  [1966]  2 L.L.I. 313, referred to.

JUDGMENT: CIVIL  APPELLATE JURISDICTION:  Civil Appeals Nos. 2138  and 2196 of 1966. Appeals by special leave from the Award dated June 27,  1966 of  the Sixth Industrial Tribunal, West Bengal in  Case  No.

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VIII-251 of 1965. N. A. Palkhivala, Jatinder Mahajan, O.C. Mathur and Ravinder Narain, for the appellant (in C.A. No. 2138 of 1966) and the respondent (in C.A. No. 2196 of 1966). A.   S.R.  Chari, R.K. Maheshwari and B.P.  Maheshwari,  for the  respondents  (in  C.A.  No.  2138  of  1966)  and   the appellants (in C.A. No. 2196 of 1966). H.K.  Sowani, K. RaJendra Chaudhuri and K.R. Chaudhuri,  for intervener No. 1. N. A. Palkhivala and D.N. Mukherjee, for intervener No. 2. M.K.  Ramamurthi,  Shyamala  Pappu  and  Vineet  Kumar,  for intervener No. 3. R. J. Kolah and O.C. Mathur, for intervener No. 4. N. A. Palkhivala and O.C. Mathur, for Intervener No. 5. A. N. Parekh and Subhag Mal Jain, for intervener No. 6. The Judgment of the Court was delivered by Shelat,  J.  By a reference dated September  17,  1965,  the Government  of West Bengal referred to the Sixth  Industrial Tribunal the following question for adjudication:               "Whether  computation of bonus in  respect  of               the  accounting  year ending 31st  March  1965               payable to the employees is in accordance with               the payment of Bonus Ordinance ?  If not, what               should  be  the  quantum   of  bonus  for  the               employees ?" 754 The dispute between the appellant company and its employees arose  in  the following manner.  The  company’s  accounting yearis  from 1st April to 31st March of the  following  year and  its books of account are maintained on  the  mercantile system  of accounting.  The company computed the  amount  of bonus  payable to its employees under the Payment  of  Bonus Ordinance  which  was  promulgated  on  May  29,  1965   and furnished on July 5, 1965 copies of its this computation  to the three respondent Unions representing its employees.  The available  surplus and allocable surplus, according to  this computation,  were  Rs.  49.96  lacs  and  Rs.  29.98   lacs respectively.   On  this  basis  the company  declared   the bonus  at  13.28  per cent of the total wages  paid  to  the employees.According   to   this  computation,   the    gross profits  came  to  Rs.  2,70,61,234/-.   Out  of  this   the company   deducted  the following amounts allowed under  the Ordinance, namely:               Rs.  28,64,000/-  as  depreciation  admissible               under   the Income Tax Act, 1961;                    Rs. 9,00,000/- as development rebate.                    Rs. 1,36,33,000/- as direct taxes.                    Rs. 1,50,000/- as dividend on  preference               shares;                    Rs.  23,37,000/- as interest at 8.5  p.c.               on paid up   capital;                    Rs. 17,80,358/- as interest at 6 p.c.  on               reserves. Thus  the available surplus came to Rs.  49,96,876/-,  sixty per cent of which, namely, Rs. 29,98,125/- was the allocable surplus.  The employees disputed the computation  contending that  the company had wrongly reduced the gross profits  and the  available surplus and that the following amounts should be  added back, viz.,provision for gratuity Rs.  18,38,605/- and  provision for doubtful  debts Rs. 50,000/-.  They  also challenged  deduction  of interest on the  reserves  on  the ground   that  the  capital  reserve of Rs. 57,00,151/-  was artificially  arrived  at  by  a  mere  revaluation  of  the company’s  fixed  assets  as on April 1,  1956.   They  also disputed the figures of depreciation, development rebate and

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direct  taxes deducted by the company while working out  the available surplus. Parliament in the meantime passed the Payment of Bonus  Act, 1965 which by sec. 40 repealed the Ordinance but which saved all  things  done and action taken under the  ’Ordinance  as having  been done or taken under the Act.  On September  27, 1965  company paid, subject to the result of the  reference, bonus  at the rate of 13.28 percent of the  wages  including dearness allowance to its employees. In its award the Tribunal allowed Rs. 23,48,226/- instead of Rs.  28,82,261/-  claimed by the  company  as  depreciation. Simiearly  it  allowed  only  Rs.  7  lacs  instead  of  Rs. 8,87,371/- claimed 755 by the company as development rebate.  As regards Rs.  18.38 lacs  claimed under the head of gratuity, the Tribunal  held that  amount  was  not  a  reserve  but  a  provision   and, therefore,  was not liable to be added ’back.  But  it  held that  the company could deduct only Rs. 10 lacs and  odd  as also Rs. 1.31  lacs  and Rs. 87,000/- and odd actually  paid during  the year to employees who retired during  that  year and  added  back  the balance of Rs. 6  lacs  to  the  gross profits.   Except for these amounts, the  TribUnal  accepted the  rest of the company’s computation.  In the  result  the Tribunal  found  the  available surplus  and  the  allocable surplus  to  be  54  lakhs  and  odd  and  Rs.  32.42   lacs respectively and directed payment of bonus at 14.55 per cent of the total wages. Both the Unions and the company obtained special leave and filed appeals challenging the  correctness of the Award. In  the  profit and loss account for the year  1964-65,  the Company  had shown Rs. 17 chores and odd as  gross  receipts and  out  of that amount had deducted diverse   amounts   as expenditure  including the sum of Rs. 23,48,226/- by way  of depreciation. In its computation filed before the  Tribunal, the Company, however, claimed depreciation at Rs. 28.82 lacs worked out by its auditors in accordance with the provisions of the Income Tax Act, 1961. The Unions disputed this amount on  the  ground  (1 ) that there was no  evidence  that  the amount  of depreciation came to Rs. 28.82 lacs and (2)  that since  the profit and loss account mentioned Rs. 23.48  lacs as  depreciation,  the company  could   claim   that  amount only.  The Tribunal accepted the Unions’ contention  stating that  there was nothing to show that the   company   through mistake  had  shown Rs. 23.48 lacs as  depreciation  in  the profit and loss account and that subsequently on finding out the  mistake it had revised in its computation  depreciation at Rs. 28.82 lacs. The Tribunal, as we shall presently show, was  in error in confusing depreciation claimed by it  as  a deduction  under sec. 6 of the Act and in thinking that  the company  had made or claimed to have made a mistake and  was trying to correct such mistake. Under sec. 205( 1 ) of the Companies Act, 1956, no  dividend can be declared or paid by a company for any financial  year except  out  of  profits  arrived  at  after  providing  for depreciation in accordance with sub-sec. (2).   Sub-sec. (2) provides different methods of calculating depreciation,  one of  which is to calculate it by dividing 95 per cent of  the original  cost  of  each  of  the  depreciable  asset  by  a specified  period  in  respect  of  each  such  asset.   The depreciation  deducted in the expenditure column in the  P&L account   therefore  was  the   depreciation   worked    out under sec. 205 ( 2 ) of the Companies ’Act.   Under sec. 2 ( 18  )  of the Bonus Act, gross profits  mean  gross  profits calculated  under  sec. 4.  In the case of  companies  other

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than a banking company, gross profits under Sec. 4 are to be computed in the manner laid 756 down  in  the 2nd Schedule.  That Schedule  requires  adding back  to  the  net  profit shown in the P  &  L  account  of depreciation deducted in that account while computing  gross profits.  Obviously, the depreciation so to be added back is the one worked out by the company under sec. 205 (2 ) of the Companies  Act.  Section 6 of the Bonus  Act  provides  that having  arrived at the gross profits under sec. 4 read  with the  2nd  Schedule,  the  Company  is  entitled  to   deduct therefrom depreciation admissible under sec. 32( 1 ) of  the Income Tax Act, that is, such percentage on the written down value as may, in the case of each of the classes of  assets, be prescribed. The fact that the company while preparing its P & L  Account and  its computation (Ex. 6) produced before  the  Tribunal, had  kept  the distinction between depreciation  worked  out under  the Companies Act and the one to be worked out  under the  Income-tax  Act for the purposes of the  Bonus  Act  is clear  from the evidence of its witness, Verma.  It was  for this  reason  that  Rs.  23  lacs  and  odd  were  shown  as depreciation  in the P & L Account while in the  computation (Ex. 6) the company claimed Rs. 28.64 lacs as  depreciation. There was, therefore, no question of the company having made any mistake in calculating depreciation in the P & L Account or  its trying to amend that mistake as erroneously  thought by  the Tribunal.  The only mistake, the company claimed  it had  made,  was  that  the  true  figure   of   depreciation deductible  under sec. 6(a) of the Bonus Act was  Rs.  28.82 lacs  and  not  Rs.  28.64 lacs.   The  Company  produced  a certificate  of  its auditors (Ex. U 2) dated  December  20, 1965  wherein  the auditors certified that  on  the  records produced  before them the true figure of depreciation  would be  the revised figure of Rs. 28.82 lacs and not  Rs.  28.64 lacs.   But  the  controversy between the  parties  was  not confined  to  the difference  between  these   two  figures. There  were   three figures for   depreciation   before  the Tribunal,  Rs. 23 lacs and odd shown in  the P & L  Account, Rs.  28.64 lacs shown in the computation and Rs. 28.82  lacs subsequently claimed by the company as the revised figure of depreciation.   The  last  two figures  were  taken  by  the company from its auditors’ certificate certifying first  Rs. 28.64 lacs and, latex on, revising that figure to Rs.  28.82 lacs  on  certain further records and  information  produced before  them.  The evidence of Verma shows clearly that  the Unions disputed the Company’s calculations of  depreciation. When  questioned  by them,  Verma could only  say  that  the calculations  were  done not by him but by  the  Secretarial Department  and, therefore, was not in a position to  answer questions  in that regard.  No witness from the  Secretarial Department was produced.  As regards their books and records produced before the auditors, his only answer was: 757               "So far as books and records mentioned in  the               first  part  of Ext. U 2  are  concerned,  the               books and record relating to the branches were               produced   before   the  representatives    of               the, auditors’ firm there, and the other books               and  records  were produced there  before  the               auditors’   firm.   So  far  as   the   record               mentioned   in   the  second   part   of   the               certificate are concerned, they are  different               records.   The informations  and  explanations               given  to  the auditors  were  given  verbally

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             after consulting our books of accounts". These  books  and  records  not  having  been  produced   or disclosed, there was obviously no opportunity to the  Unions to verify either of the two figures, viz., Rs. 28.64 lacs or Rs.  28.82  lacs.   It  is true that  Verma  said  that  the calculations shown to the auditors could be produced but  he qualified  the  offer by saying that would be  done  if  the Tribunal required. Since the company claimed the deduction of depreciation,  it stands  to  reason  that  the  burden  of  proof  that   the depreciation  claimed  by  it  was  the  correct  amount  in accordance  with  the Income Tax Act was on the Company  and that burden the company must discharge once its figures were challenged.   But  it was; contended that once  the  company produced   its   auditors’  certificate.  that   should   be sufficient and must be accepted and that the Tribunal should not insist either on the auditors proving their  certificate or  on  the company proving depreciation on each  and  every item  of  depreciable  asset.  Such an  enquiry  before  the Tribunal, it was argued, would be a harassing and  prolonged enquiry,  not contemplated in  industrial adjudication  and, therefore,  the  Tribunal ought to have accepted as  correct Rs. 28.82 lacs certified by the auditors.  Under sec. 23  of the  Act the presumption of accuracy is allowed only to  the balance  sheet and the P & L Account of companies.  No  such presumption  is  provided  for  by  the  Act  to   auditors’ certificates.  Speaking of rehabilitation amount  deductible as a prior charge under the Full Bench formula while working out  the available surplus this Court in Khandesh  Spg.  ana Wvg.  Mills  Co.  Ltd. v. Rashtriya  Girni  Kamgar  Sangh(1) observed at page 847 as follows:               "The   importance   of  this   question   (the               procedure  to  be  followed  for  ascertaining               facts)   in the context of fixing  the  amount               required  for rehabilitation cannot  be  over-               estimated.  The  item  of  rehabilitation   is               generally  a major item that enters. into  the               calculations  for the purpose of  ascertaining               the  surplus  and, therefore,  the  amount  of               bonus.  So, there would be a tendency on   the               part  of the employer to inflate  this  figure               and the (1) [1960] 2 S.C.R. 841,847. ap. C. 1./69-2 758               employees  to deflate it.  The accounts  of  a               company  are prepared by the management.   The               balance-sheet and the profit and loss  account               are  also prepared by the company’s  officers.               The  labour  have no concern in it.   When  so               much  depends on this item, the principles  of               equity  and justice demand that an  Industrial               Court should insist upon a clear proof of  the               same  and  also  give  a  real  and   adequate               opportunity  to  the  labour  to  canvass  the               correctness  of the particulars  furnished  by               the employer." The  necessity  of  proper  proof  of  the  correctness   of statements  in  the  balance-sheet was  repeated  in  Petlad Turkey  Red  Dye  Works Ltd. v.  Dyes  &  Chemical  Workers’ Union(1).   These observations made with regard to  balance- sheets and P & L accounts  would equally apply to statements made  in  ,the  auditors’  certificates  ’prepared  on   the instructions and information supplied to them by  employers. Mere  production of auditors’ certificate,  especially  when it is not admitted by labour, not by the auditors but by the

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employees  of  the  company who admitted not  to  have  been concerned with its preparation or the calculations on  which it  was based. would not be conclusive.  We do not say  that in  such  a case the Tribunal should insist  upon  proof  of depreciation  on  each  and every item of  the  assets.   It should,  however, insist  on  some reasonable proof  of  the correctness  of the figure of depreciation claimed   by  the employer either by examining the auditors who calculated and certified it or by some other proper proof.  Depreciation in some  cases would be of a large amount affecting  materially the  available surplus.  Fairness, therefore, requires  that an  opportunity  must be given ’to the employees  to  verify such  figures  by cross-examination of the employer  or  his witnesses   who   have   calculated   depreciation   amount. Notwithstanding  the  Unions’  challenge to  the  figure  of depreciation claimed by the company, the only thing that the company did was to examine Verma, who admittedly had nothing to  do with its calculation, and to produce through him  the said certificate.  In our view, that was neither proper  nor sufficient.   The proper course for the Tribunal in  such  a case was to insist upon the company adducing legal  evidence in  support  of its claim instead of taking  the  figure  of depreciation from the P & L account which was not worked out in accordance with the Income Tax Act but under sec. 205  of the Companies Act, and saying that the Company had failed to prove  that  it  was a mistaken figure.  In  our  view,  the question  as to the correct amount of depreciation  must  go back  to  the Tribunal for a fresh decision.   The  Tribunal should  give opportunity to the Company to prove  its  claim for  depreciation by reasonable proof and to the  Unions  to test such evidence by cross-examination or otherwise. (1) [1960] 2 S.C.R. 906, 909. 759 An  error of the same type seems to have been  committed  by the  Tribunal  in  the matter  of  development  rebate.   It allowed  Rs.  7 lacs as development rebate. instead  of  Rs. 8.87  lacs.  claimed by the Company.  Under sec. 33  of  the Income   Tax  Act,   an  assessee  is  allowed  by  way   of development  rebate  a  certain percentage of  the  cost  of machinery   or   plant  depending  on  the  date   of    its installation.   Section   34(3)   of   that  Act   provides, however, that the said allowance shall not be given   unless an amount equal to 75 per cent of the development rebate  to be  allowed is debited to the P & L account of the  relevant previous  year  and  credited to a  reserve  account  to  be utilised  by the assessee in the 8 years next following  for the  purposes of the undertaking. Accordingly,  the  Company appropriated Rs. 7 lacs to the development rebate reserve as it was bound to do if it wanted to claim development rebate. The Company took the round  figure Rs. 9 lacs instead of Rs. 8.87  lacs for development rebate and credited Rs.  7  lacs, being 75 per cent thereof to the development rebate reserve. Under the Second Schedule to  the Bonus Act, read with  sec. 4 thereof the Company is required while computing its  gross profit  to add the development rebate and as footnote  1  in that  Schedule  shows "to the extent charged to  profit  and loss account", that is, Rs. 7 lacs.  Under sec. 6(b) of  the Bonus  Act, the Company is entitled, however, to deduct  out of  the  gross profits arrived at under sec. 4, the whole of the development rebate admissible under the Income Tax  Act, i.e., the amount,  75 per cent of which comes to Rs. 7 lacs. The error which the Tribunal fell into was in mixing up  the development  rebate  reserve  to which the  Company  had  to appropriate Rs. 7 lacs in P & L account and the  development rebate of Rs. 8.87 lacs allowable to it under sec. 6 of  the

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Act.  Mr. Chari for the Unions fairly conceded that he could not  challenge  this  position.   There  was,  therfore,  no justification  for the Tribunal to allow Rs. 7   lacs   only instead  of Rs. 8.87 lacs as development rebate. The next question relates to a sum of Rs. 18.38 lacs,  being the estimated liability under two gratuity schemes framed by the Company, which was deducted from the gross  receipts  in the  P  &  L  account.  In 1960  the  Company  introduced  a gratuity  scheme for its employees other than its  officers. Under that scheme gratuity was payable on the termination of an  employees’s service either due to retirement,  death  or termination of service, the amount of gratuity payable being dependent on his wages at that time and the number of  years of service put in by him.  The Company had worked out on  an actuarial   valuation  its  estimated  liability  and   made provision for such liability not all at once but spread over a number of years.  Thus in 1959-60, 1960-61 and 1961-62 the Company allocated towards this liability Rs. 5 lacs. Rs.  10 lacs and Rs. 5 lacs respectively from out of the profits, 760 debiting  these amounts in the profits and loss account.  In all  Rs. 40 lacs have so far been provided in the  aforesaid manner against the said liability.  The practice followed by the  Company  is that every year the Company works  out  the additional liability incurred by it on the employees putting in  every additional year of service.  Whenever an  employee retires,  the amount of gratuity payable to him  is  debited against the amount provided  for  as aforesaid.  The  amount so  paid is not debited in the P & L account as an  outgoing or expenditure but against the estimated liability  provided as aforesaid.  In 1964-65 the, Company introduced a  similar gratuity scheme for its officers.  According to the Company, the estimated liability under this scheme was worked out  at Rs.  20  lacs.  But instead of providing the  whole  for  it provided  only Rs. 11.31 lacs.  It also provided Rs. 7  lacs under the scheme for its non-officers against the  liability for  service put in by them in that year.  Out of Rs.  18.38 lacs   so  provided,  the  Company  paid  as  gratuity   Rs. 1,31,585/- and  Rs.  87,295/to officers and other  employees who  retired  during 1964-65, debiting as  aforesaid,  these amounts  not as an outgoing or expenditure but  against  the said  amounts of Rs. 11 lacs  and  Rs. 7 lacs.  The  Company claimed  that it was entitled to. deduct the balance of  Rs. 16  lacs from the gross receipts in the P & L account  while working  out its net profit.  The Unions contended that  the Company  could deduct from the gross receipts only Rs.  1.31 lacs and Rs. 87,000/- and odd actually paid during the year. The Company, on the other hand, maintained that what it  had ’done was legitimate and was warranted by the principles  of accountancy  and, therefore, the whole amount of  Rs.  18.38 lacs   was deductible in arriving at its net profits.   What the  Tribunal  did, however, was that  instead  of  squarely facing this controversy, it held that as the Company had  in the  former  years debited Rs. 5 lacs e.g., in  1959-60  and 1961-62, it would allow only Rs. 5 lacs for each of the  two schemes.  Thus it allowed Rs. 10 lacs as dubitable in the  P &  L account in addition to the said Rs. 1.31 lacs  and  Rs. 87,000/-  and  disallowing the balance of Rs. 6  lacs  added back  that  amount  in the net profits shown in the  P  &  L account. The  contention of Mr. Chari was two fold:  (1 )  that   the amount  which could be debited was that which  was  actually paid and the Company was not entitled to debit in the P &  L account any amount worked out by it as estimated  liability. The  Tribunal. therefore, was not justified in allowing  the

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Company  to  debit  any such amount and  that  the  Tribunal arbitrarily  fixed  Rs.  10 lacs and  allowed  wrongly  that amount  to  be  deducted; and (2)  even  if  such  estimated liability  was  debitable, the appropriation amounted  to  a reserve and under the Bonus Act such a reserve had to be 761 added back while working out the gross profits under the 2nd Schedule to the Act. Two   questions,  therefore,  arise:  (1)  whether   it   is legitimate  in  such a scheme of gratuity  to  estimate  the liability   on  an  actuarial  valuation  and  deduct   such estimated  liability in the P & L account while working  out its   net   profits;  and  (2).i.f  it  is,   whether   such appropriation amounts to a reserve or a provision.  If it is a  reserve, obviously the amount has to be added back  while computing the gross profits.  But in that event the  Company would  be  entitled to interest thereon at 6  per  cent  per annum  under Item 1 (iii) of the Third Schedule to the  Act. In  the  case  of an assessee maintaining  his  accounts  on mercantile  system, a liability already accrued,  though  to ’be discharged at a future date, would be a proper deduction while  working  out the profits and gains of  his  business, regard  being had to the accepted principles  of  commercial practice and accountancy.  It is not as if such deduction is permissible  only  in case of amounts actually  expended  or paid.  Just  as  receipts, though not  actual  receipts  but accrued   due  or brought in for income tax  assessment,  so also  liabilities  accrued due would be taken  into  account while working out the profits and gains of the business.   A Company  carrying on business of buying land and selling  it after development sold certain plots, received a part of the price  but entered the whole of the price receivable  as  it maintained  its books of accounts on mercantile method.   It also debited a certain sum, being the estimated  expenditure for  the developments it undertook to carry out  within  six months from the execution of the sale deeds although no part of such expenditure was actually incurred during that  year. It  was held that having regard to the  accepted  commercial practice   and  trading  principles  and  there  ’being   no prohibition  against it in the Income Tax Act, deduction  of such  estimated liability even though it did not come  under any  specific provisions of sec.  10(2)  of  the Income  Tax Act,  1922  was permissible; (see Calcutta Company  Ltd.  v. CJ.T.(1)    Such  a  deduction  of  an   accrued   liability though  not actually paid is not confined to the Income  Tax Act only but is also perrnissible under the Wealth Tax  Act, 1957.  In Commissioner of Wealth Tax v. Standard Vacuum  Oil Co. Ltd.(-2) demands in respect of payment of tax under sec. 18A   of   the Income Tax Act, 1922 were  made  against  the ’assessee company for 1956-57.  The final installment of Rs. 47 lacs and odd for each of the two years was outstanding on the  respective valuation dates.  The question  was  whether the demand ,for such tax could be deducted while determining the  net wealth of the Company. This Court held that a  debt is  "owed’  when  an order is passed under sec.  18A  and  a notice  of  demand  is sent.  The amount  mentioned  in  the notice begins to be ’owed’ till a new figure is (1) [1960]1 S.C.R. 185.           (2) [1966] 2 S.C.R. 317. 762 substituted by the assessee under sec. 18A(2) of the  Income Tax  Act.  But till that is done, the amount is  ascertained and  there  is   a statutory liability to  pay  the  amounts mentioned in the order  under sec. 18A(1) and were debts  on the  valuation  dates and,  therefore,  deductible  for  the purpose  of  arriving ’at the Company’s   net  wealth.   The

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Court also held that a condition subsequent, the  fulfilment of which may result in the reduction or even extinction   of the  liability, would not have the  effect   of   converting that  liability into a contingent liability.  The  decision, no   doubt,  turned on the meaning of ’debt’ as  defined  by sec.  2(m) of the   Wealth Tax Act, the.Court there  holding that the statutory liability to pay the amount mentioned  in the  order commenced when the demand notice was served  and, therefore, the liability did exist  in present.  In  Kesoram Industries  and Cotton Mills Ltd. v. C.W.T.(1) also  a  case under  the Wealth Tax Act, the appellant company  showed  in its  P  &  L  account two amounts:  (1  )   the   amount  of dividend proposed to be distributed for that year and    (2) another  sum  as  a provision for tax  liability  under  the income  Tax Act, 1922.  The question was whether  these  two sums were   debts and could be deducted while computing  the Company’s  net wealth.  It was held that the dividend amount was not a debt   as on the valuation date nothing more  than a recommendation by  the Directors had taken place.  But  as regards the estimated tax liability, it was held that it was a  debt  inasmuch as the liability   to pay the tax  was  in present though payable in future and was   in respect of  an ascertainable sum of money.  In Standard Mills   Co. Ltd. v. Commissioner  of Income Tax(2) the decision turned   on  the question  whether an estimated  liability   under   gratuity schemes framed under Industrial awards amounted t0 debts and could  be  deducted  while computing  the  net  wealth.   On reliance    having been placed on Southern Railway  of  Peru Ltd. v. Owen(a)  a decision to which we shall presently come the  Court  observed’   at page 773  that  decision  had  no relevance to the question   before it as the House of  Lords in   that   decision  was  concerned  in   determining   the deductibility  of the present value of a  liability    which may  arise  in future in the computation of  taxable  income for  the relevant year under the Income Tax laws-The   Court held,  in view of the terms of sec. 2(m) of the  Wealth  Tax Act,  that  as  the liability to pay  gratuity  was  not  in presents  but  would arise in future on the  termination  of service   i.e.  on retirement,  death  or  termination;  the estimated  liability  under  the  schemes   would not  be  a debt and, therefore, could not be deducted while   computing the  net wealth.  These observations  show  that  the  Court was of the view that though such a liability is a contingent  liability and therefore not a ’debt’ under sec. 2(m) of the Wealth    Tax Act, it would be deductible under  the  Income Tax Act while (1) [1966] 2 S.C.R. 688. (2) [1967] 1 S.C.R. 768. (3) [1957] A.C. 334. 763 computing  the  taxable profits.  In the instant  case,  the question  is  not whether such estimated  liability  arising under  the gratuity schemes amounts to a debt or  not.   The question  that concerns us is whether while working out  the net profits a trader can provide from his gross receipts his liability to pay a certain sum for every additional year  of service which he receives from his employees.  This, in  our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted  present value.  Even  if the liability is  a  contingent  liability, provided  its discounted-present value is ascertainable,  it can   be   taken  into  account.    Contingent   liabilities discounted  and   valued   as necessary can  be  taken  into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated  without  taking  them  into  account.  Contingent

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rights, if capable of valuation, can similarly be taken into account  as trading receipts where it is necessary to do  so in  order to ascertain the true profits: (see C.N.  Beatti’s Elements  the Law of Income and Capital Gains  Taxation  8th ed. 54). In  Southern Railway of Peru Ltd. v. Owen(1), the  House  of Lords  was  concerned with the problem similar to.  the  one before us and, therefore, the observations made there  would be of assistance.  An English  Company  operating  a railway in   Peru was under the laws of that country liable  to  pay its.  employees  compensation on the termination’  of  their services either by dismissal or on termination of service by notice  or  on  such termination by death  or  affluence  of contractual  time.  The compensation so paid was  an  amount equivalent to one month’s salary at the rate in force at the date of determination of every year of service. The  Company claimed to be entitled to charge against each years receipts the  cost  of making provision for the  retirement  payments which  would ultimately be thrown  on it,  calculating   the sum  required  to  be paid to each employee  if  he  retired without feature at the close of the year and setting’  aside the  aggregate of what was required insofar as the year  had contributed  to the aggregate.  The House of Lords  rejected the  deductions  on  the  ground  that  in  calculating  the deduction  the company had ignored the factor  of  discount. But   their  Lordships  recognised  the principle  that  the company was entitled to charge against each year’s  receipts the  cost of making provision for  the  retirement  payments which  would  ultimately be payable as the company  had  the benefit of the employees’ services during the year  provided the  present value of  the future payments could  be  fairly estimated.   The contention on behalf of the Crown was  very nearly  the  same as the one before us.   Counsel  conceded, that a trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but (1) [1957] A.C. 334. 764 also  the present value of any payments in respect of  their services in that year to be made in a subsequent year if  it can  be  satisfactorily estimated.  But it was  argued  that proposition  would not apply to that case as the company was not  in  any  year under a definite obligation  to  pay  its employees  lump sums on the termination of their  employment as  in each case the right to a lump sum was  contingent  on certain  conditions being fulfilled and’ so the  prospective liability remained contingent until the service was actually ended.   The  lump sum could not be regarded  as  earned  or payable  in  respect of a particular year  of  service  and, therefore, the whole sum should be debited in the account of the last year  of service.  This contention was not  upheld. In  the  course of his opinion, Lord  Radcliffe  cited  with approval the dictum of Lord Haldane in Sun Insurance  Office v. Clark(1) at p. 455, namely:               "It is plain that the question of what ,is  or               is not profit or gain must primarily be one of               fact,  and  of fact to be ascertained  by  the               tests applied in ordinary business.  Questions               of  law  can only arise when (as was  not  the               case here)  some  express statutory  direction               applies   and  excludes  ordinary   commercial               practice,  or  where, by reason of  its  being               impracticable    to   ascertain   the    facts               sufficiently,  some  presumption  has  to   be               invoked to fill the gap."-

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Holding  that there was no such statutory rule   prohibiting the  commercial practice of providing for such an  estimated liability  for each year, he compared the: two  systems  and observed at pp. 351-352 as follows:               "Now the question is how ought the effects  of               this  statutory scheme to be reflected in  the               appellant’s  accounts  of the  annual  profits               arising  from  its trade ? One way,  which  is               certainly  the  simplest one, is  to  let  the               payments made fall entirely as expenses of the               year  of  payment and ignore any  question  of               making  provision for the maturing  obligation               during  the  years  of  service  that  precede               it   ............   It  has  one  considerable               advantage; no element of estimate or valuation               appears  in the profit assessment and  nothing               is  charged to profits except the actual  cash               outgoing.  But, when this has been conceded, I               think   that  there  is  the   very    serious               disadvantage to be set against the inefficient               method of arriving at the true profits of  any               one  year.   The  retirement  benefit  is  not               obviously paid to obtain the services given in               the  year  of  retirement.   The  incident  of               retirement payments must be variable from year               to year, and (1) [1912] A.C. 443. 765               they  may inordinately depress the profits  of               one year just as they may inordinately inflate               the  profits of another. It is true  that  the               company  carries on business from one year  to               another, but it is not charged on the  average               of   its   annual  profits.  Tax   rates   and               allowances  themselves  vary and,  apart  from               that,  to  charge  tax  on  a  profit   unduly               accelerated  or  unduly  deferred  is,  in  my               opinion,  no more respectable  an  achievement               than  to  admit that the  annual  accounts  of               business   do  in  some  cases   require   the               introduction  of estimates or valuations if  a               true statement of profit i,s to be secured.               Another method is that which the appellant  is               seeking  to  establish  with  regard  to   its               assessments   for   the   four   years   1947-               1950   .....   What the appellant  claims  the               right  to do is to charge against each  year’s               receipts the cost of making provision for  the               retirement  payments that will  ultimately  be               thrown  upon it by virtue of the fact that  it               has had the benefit of its employees’ services               during that year.  As a corollary it will  not               make  any charge to cover the actual  payments               made  in  the year in respect   of  retirement               benefits.  Only by such a method, it is  said,               can   it bring  against  the receipts  of  the               year the true cost of the services that it has               used   to  earn  those  receipts.    Generally               speaking,  this must, I think, be true.   For,               whereas  it  is possible that any one  of  its               many employees may  forfeit  his benefits  and               so  never require a payment,  the  substantial               facts  of  the  situation are  that  when  the               company  has paid every salary and wage  ’that               is due  for  current remuneration of the  year

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             it  has  not by any  means  wholly  discharged               itself  of  the pecuniary burden  which  fails               upon it in respect of the year’s employment." Agreeing with the company’s claim he observed that provision for retirement payments would give an accurate reflection of the  true costs of earning the year’s receipts  than  merely charging  against them the year’s payment to  employees  who retired in the year. That  there  is  no  rule against  providing  for  any  such contingent liability but on the contrary such a provision is permissible  can be seen from the form of  balance-sheet  in Schedule VI to the Companies Act, 1956 where provisions  for taxation,  dividends. provident fund schemes, staff  benefit schemes and other items for which a company is  contingently liable  are  to  be  treated  as  current  liabilities  and, therefore,  dubitable against the gross  receipts.  Schedule VI,  Part 2, lays down the requirements of profit  and  loss account   and  el. 3 (ix) of it provides that a  profit  and loss  account  shall  set out  amongst  other   things   the aggregate   of  amounts  set aside or  provisions  made  for meeting. specific liabili- 766 ties, contingencies or commitments.  But the contention  was that  though Schedule VI to the Companies Act may  permit  a provision  for contingent liabilities, the  Income-tax  Act, 1961 does not, for under sec. 36(v) the only deduction  from profits  and  gains  permissible  is of a  sum  paid  by  an assessee  as an employer by way of his contribution  towards an’ approved gratuity fund created by him for the  exclusive benefits  of his employees under an irrevocable trust   This argument  is  plainly incorrect because sec. 36  deals  with expenditure  deductible  from  out  of  the  taxable  income already  assessed  and not with deductions which are  to  be made  while  making  the P & L account.   In  our  view,  an estimated liability under gratuity schemes such as the  ones before us, even if it amounts to a contingent liability  and is  not  a  debt   under  the Wealth  Tax  Act  if  properly ascertainable and its present value is fairly discounted  is deductible from the gross receipts while preparing the P & L account.  It is recognised in trading circles and we find no rule  or direction in the Bonus Act which prohibits  such  a practice. The  next  question is whether the amount so provided  is  a provision or a reserve.  The distinction between a provision and  a  reserve is in commercial  accountancy  fairly  well- known.   Provisions  made against anticipated   losses   and contingencies   are charges against profits and,  therefore, to be taken into  account against gross receipts in the P  & L account and the balance-sheet. On the other hand, reserves are  appropriations  of  profits,  the assets by which  they are  represented being retained to form part of the  capital employed  in the business.  Provisions are usually shown  in the  balance-sheet by way of deductions from the  assets  in respect of which they are made whereas general reserves  and reserve  funds  are  shown  as  part  of  the   proprietor’s interest:   (See  Spicer  and  Peglar’s   Book-keeping   and Accounts,  15th  ed. p. 42). An amount  set   aside  out  of profit  and   other  surpluses,   not  designed  to  meet  a liability  contingency commitment or diminution in value  of assets known to exist at the date of the balance-sheet is  a reserve  but  an amount set aside out of profits  and  other surpluses  to provide for any known liability of  which  the amount  cannot be determined with substantial accuracy is  a provision,  (see William Pickles Accountancy,  Second  Edn., 192,  Part  III, cl. 7, Sch. VI to the Companies  Act,  1956

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which defines provision and reserve). Under  sec. 23 of the Bonus Act, there is ’a presumption  of the  genuineness  of  the P & L  account  produced  by   the company  unless  it  is challenged in  the  manner  provided therein. The Company’s case was that the estimated liability under   the  gratuity schemes in respect of  the  accounting year   was  ascertainable  with  fair  accuracy  under   the actuarial  valuation  and  Rs. 16 lacs which  it  took  into account while making it P & L  account  was  the 767 present  discounted liability.  This position does not  seem to  have been disputed before the Tribunal.  The   principal contention  urged  against  that figure  was  not  that  the estimated liability was not ascertainable or as in the  case of Southern Railway of Peru(1) that it did not represent the present  discounted  value, but that the Bonus  Act  permits only  the deduction of the amount actually paid  during  the accounting year.  This was also the  principal contention of Mr.  Chari before us.  Mr. Ramamurthi, appearing for one  of the  interveners, argued that though it may be  possible  to take into account such a contingent liability in arriving at the  true  profits and gains under the  Income-tax  Act,  it would not be so under the Bonus Act as the scheme of the Act treats   the  accounting  year as  a  unit  and,  therefore, reserves   or  provisions  on  the  footing   of   estimated liabilities  to  be  paid in future  cannot  be  taken  into account.   But  under the Income-tax Act also  the  previous year  is a unit and it is only the profits and gains  during that year which are taxable.  If under the Income-tax Act an estimated liability ascertainable with substantial  accuracy can  be  taken into account for arriving at the true profits and  gains, there is no reason why the same cannot  be  done under  the Bonus Act unless ’there is any provision  therein forbidding   such  a  practice  recognised   by   commercial accountancy.  No such provision was  shown  to exist in  the Bonus Act. The  Tribunal in allowing Rs. 10 lacs out of the   estimated ’Rs. 16 lacs impliedly accepted the principle canvassed   by the company.  It, however, allowed only Rs. 10 lacs  because it  thought  it to be excessive as in some prior  years  the Company  had deducted Rs. 5 lacs. But this was not  done  on the  ground  that  the  estimate of  Rs.  16  Iacs  was  not warranted  on any valuation. In our view, in the absence  of any challenge as to the correctness of the valuation and  in the  absence of any challenge that such liability cannot  be estimated  on any fair standard, the Tribunal ought to  have allowed  the  whole  of Rs. 16 lacs  to  be  deducted  while arriving at the net profits in the P & L account. Turning  now  to  the  appeal filed  by  the  employees  two question besides those already disposed of were raised:  one dealing  with  interest  on capital reserve  and  the  other relating  to  the amount of direct taxes to be deducted from the gross profits. As regards the first question, Verma’s evidence was that the Company  had revalued its fixed assets in 1956.and  credited the difference of Rs. 57 lacs between its cost and the value fixed  on  such revaluation, to the  capital  reserve.   The Tribunal  accepted  the valuation as bona fide  and  allowed interest  on  the said reserve at 6 per cent  in  accordance with  sec.  6(d) and el. 1 (iii) of the 3rd  Schedule.   Mr. Chari’s contention was that the revaluation (1) [1957] A.C. 334. 768 by   the  director  in  1956  was  fictitious;   that    the difference   of Rs. 57 lacs was a mere book  adjustment  and

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did  not  add to the wealth of the Company and  though  that amount was transferred to the capital reserve it was not  as if   any   additional   amount  became  available  for   the Company’s   business   and  therefore,   no   interest   was permissible   on such an artificial amount.  At first  blush it would seem as if there is some force in this  contention, for it would be possible for a company to deflate its  gross profits  by  fictitiously  revaluing  its  fixed  assets  at regular  intervals  red claiming interest on the  excess  by carrying  such excess to capital reserve and to reduce  thus labor’s claim to bonus.  In the present case the revaluation was made as early as in 1956 and it does not appear that  it was ever objected to either by ’the Company’s auditors or by any  one else  concerned  with  the   Company’s  management. It cannot, therefore, be legitimately  said that it was done for any oblique purpose, much less with a view to defeat the labor’s  claim to bonus.  It is true that  such  revaluation does  not bring in any tangible additional amount  into  the company’s  coffers which it can use for its  business.   But under sec. 211 of the Companies Act every balance-sheet of a company  must  give  a true and fair view of  the  state  of affairs of the company as at the end of the financial  year. Sch.  VI to the Companies Act also provides that where  sums have  been  written  off  on a reduction  of  capital  or  a revaluation of assets the  balance-sheet  subsequent to such reduction  or  revaluation  must show  the  reduced  or  the increased  figures  as  the case may  be.   Apart  from  the provisions  of  the  Companies  Act,  it  is  a   recognised principle of accountancy to transfer the increased value  of assets on revaluation to a capital reserve account.  Such an increased figure is an unrrealised accretion in the value of a  fixed asset.  (see Pickles Accountancy 2nd Edn.  pp.  103 and 935).  So that the fact  such  an  increased figure does not actually bring in any additional amount  to  the Company does  not make the capital reserve any the less  a  reserve. Nor  is  it possible to postulate that if such  a  claim  is allowed   to  be  deducted,  the  management  would  go   on artificially inflating the value of the fixed assets with  a view  ’to  claim interest.  In the first place, if  such  an inflation is made mala fide, the Tribunal can always  reject it.   In  the second place, it is hardly  profitable  for  a company  to resort to such a practice for under  the  Wealth Tax  Act  the  company  would  be  liable  to  an  increased assessment. Section 7(2) of that Act provides that where  an assessee  is carrying on a business for which  accounts  are maintained regularly, the Wealth Tax Officer may instead  of determining  separate  the value of each asset held  by  the assessee  determine  the  net  value of  the  asset  of  the business  as a whole having regard to the balance  sheet  of such  business  as  on the  valuation  date.    In   Kesoram Industries  v.  Commissioner of Wealth Tax(1)  the  assessee sought (1) [1966] 2 S.C.R. 688. 769 to argue exactly what Mr. Chari contended, namely, that  the revaluation of the assets made by him did not represent  the true value of the assets.  That contention was rejected  and this Court held that the Wealth Tax Officer was entitled  to rely on such revaluation and proceed  to assess on the basis of the net wealth shown as a result of such revaluation.  We do   not,   therefore,  see  any   justification   for   the apprehension felt by Mr. Chaff, for, by trying to reduce the gross  profits,  the Company would land  itself  into  being assessed   on a higher  net  wealth.  The Tribunal  was,  in our  view, right in accepting the figure of Rs. 57 lacs  and

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deducting interest thereon from the gross profits. There  remains  now  the  question  regarding    computation of direct taxes.  Section 6(c) of the Act provides:               "subject  to the provisions of section 7,  any               direct    tax which the employer is liable  to               pay for the accounting year in respect of  his               income, profits and gains  during that year;"               Section 7 inter alia provides:               "For  the purpose of clause (c) of section  6,               any direct tax payable by the employer for any               accounting   year   shall,  subject   to   the               following  provisions.  be calculated  at  the               rates  applicable   to the   income   of   the               employer for that year,  .......... The Company claim  a deduction from the  gross  profits   of Rs,  145  lacs  as direct taxes.   It  had  made  provision, however;  for  Rs. 130 lacs for direct taxes in the  P  &  L account.  In its computation it had made a provision for Rs. 136  Iacs.   At the stage of the evidence and  arguments  it contended  however that the proper amount would be  Rs.  145 lacs.   It  claimed that direct taxes are to be  worked  out under sec. 6(c) on the gross profits worked out under sec. 4 less  the  prior  charges allowable under  sec,  6,  namely, depreciation  and development rebate, but without  deducting from  such balance the bonus payable by the Company  in  the particular  accounting  year.   The  Tribunal  accepted  the contention  and allowed Rs. 145 lacs. as direct taxes to  be deducted under s. 6 (c). This  conclusion has been seriously disputed by the  Unions. Mr.  Chari’s  argument was that the Act lays  down  its  own statutory  formula  for working out available  surplus   and allocable  surplus,  that the deduction from  gross  profits allowable  are  those  permissible under  the  Act,  namely, depreciation  admissible  in accordance with the provisions’ of sec. 32(1) of the Income-tax Act, the development  rebate and  subject  to the provisions of sec. 7 of  the  Act,  the amount of direct taxes which the employer "is liable to pay" for  the accounting year in respect of "his income,  profits and gains during that year".  Mr. Chari laid stress on the 770 words  "is  liable to pay"’ and "in respect of  his  income, gains and profits during that year" and argued that inasmuch as cl. (c) incorporates ’the language of the Income-tax Act, it contemplates that the employer is entitled to deduct  his actual  tax  liability. Such liability, therefore, is to  be worked out in accordance with the provisions of the  Income- tax  Act  and other relevant Acts by first arriving  at  the actual  taxable income, gains and profits under  those  Acts and  then computing the taxes at rates provided by them  for that  particular accounting year.  He argued that since  cl. (c) is subject to the provisions of s. 7, the only departure permissible under the Act is that which is provided in s. 7. His  contention  thus was that the Tribunal must  start  its calculations from the net profit shown in the P & L  account which  would have made provision for direct taxes  and  then deduct  from  the gross profits calculated under  s.  4  the prior  charges  permissible under s. 6.  The  provision  for direct  taxes  made in the P & L account would  be  computed after  deducting  from the gross receipts  such  deductions, allowances,   reliefs,   rebates,  credits   etc.   as   are permissible under the Income-tax Act which would include the bonus  amount  payable during the year,  for,  without  such deduction   the  P & L account cannot reflect the  true  net profit  of the employer.  The Company’s contention,  on  the other hand, was that the employer is entitled to compute his

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tax liability without deducting first the amount of bonus he would be liable to pay from out of the amount computed under s. 4 and s. 6.  Mr. Palkhiwala submitted from the  different provisions  of  the  Act  that the  concept  of  actual  tax liability  under the Income-tax Act is foreign to the  Bonus Act  inasmuch  as  the Bonus Act  is  concerned  with  gross profits calculated in accordance with s. 4 and Sch. II,  and that  s.  7  to which s. 6(c)  is  made  subject,  militates against  the concept of actual tax liability as  worked  out under the Income-tax Act.  The contention was that prior  to the  enactment of the Act when available surplus was  worked out  under  the Full Bench Formula bonus  was  not  deducted while arriving at. the amount of income-tax deductible  from gross  profits,  that  Parliament could  not  possibly  have contemplated  a  departure  from the course  followed  in  a number  of  decisions  both  of  courts  and  tribunals  and suddenly   decided   to  incorporate  into  this   Act   the complicated  and elaborate provisions of the Income-tax  Act and  throw  the burden on Industrial Tribunals to  work  out deductions,  allowances,  reliefs, rebates  etc.  under  the Income-tax Act and then finally to assess  the  actual   tax liability.  It was submitted that what has to be done by the Tribunal  is first to work out gross profits under s. 4  and Sch. II and then to deduct therefrom the prior charges under s.  6 (a ) and (b) and estimate direct taxes on the  balance and  thus arrive at the available surplus.  The  controversy thus is one of principle rather than on the amount  deducted by the Tribunal by way of direct taxes. 771 Before  we attempt to resolve this controversy, it  will  be worth our while to recount the principle consistently follow before the passing of this Act, not with a view to interpret s.  6(c),  but to ascertain whether Parliament  has  made  a departure   from   that  principle  and  laid   down  a  new procedure  on  which direct taxes are to be  computed.   Mr. Chari’s  contention was that the Bonus Act is drafted  on  a clean  slate  giving a go-bye to the  earlier  principle  of working  out bonus, and, therefore, we must proceed  on  the footing  of the language used in s. 6(c). At first sight  it would  appear that the language of el. (c) lends support  to his  contention.   But acceptance of that  contention  would mean  incorporating   into the Bonus Act the  elaborate  and complicated  provisions of not only the Income-tax  Act  but other Acts levying direct taxes and throwing a  considerable burden  on  Tribunals, least equipped with working  out  the provisions  of  those Acts  entailing  inevitably  prolonged enquiries.    Therefore,  we  must  proceed  cautiously   in examining   the  scheme  of. the  Act  before  we   conclude on  the  interpretation to be given to s.  6(c)  and  s.  7. Calculating  the  avail. able surplus under the  Full  Bench Formula  used  to work out nationally the  amount  of  bonus which   they  thought  would be awarded  and  deducted  that amount  from the gross profits, on the remaining balance  of which,   income   tax  payable  by  the  employer  would  be determined.   The  result  of this procedure  was  that  the amount  of  tax  so worked  out  was  proportionately  less. Deprecating this procedure, Gajendragadkar, J., (as he  then was)  observed  in Associated Cement Companies Ltd.  v.  The Workmen(1) as follows:               "Logically  it  is only after  all  the  prior               charges have been determined and deducted from               the  gross profits that available surplus  can               be  ascertained;  and  it is  only  after  the               available  surplus  is  ascertained  that  the               question of awarding bonus can be  considered.

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             Some  tribunals seem ’to work  out  nationally               the  amount of bonus which they think  can  be               awarded  and  placed  that amount higher up in               the process of making, calculations before the               income-tax  payable  is determined   ....   We               wish  the  make it clear that  this  procedure               should not be followed." In Crompton Parkinson (Works) Private Ltd. v. Its Workmen(2) disapproval  of  the said procedure was once  again  voiced, Das,  C.J. observing that such a procedure is certainly  not giving  effect to the bonus formula "but amounts to  ad  hoc determination which may vary according  to the length of the proverbial foot of the Lord Chancellor and is bound to  lead to  chaos   and   industrial unrest." In  Workmen  of  India Explosives Ltd. v. Indian Explosives (1) [1959] S.C.R 925at974.          (2) [1959] Supp. 2S.C.R. 936. 772 Ltd.(1)  the labour relied on the report of  the   Directors which  was to the effect that no income tax was  payable  on the  year’s result and a total of Rs. 62.39 lacs made up  of income tax and development rebate was being carried forward. On  this report it was argued that no. deduction  should  be made for income tax. Negativing ’the contention it was  held that  in  the  application of the  Full  Bench  Formula  the deduction  of income tax is notional, the gross profits  are arrived  at by adding back certain items to the net  profits and  then  the gross profits are reduced by  making  certain notional  deductions,  one such deduction is under the  head of income tax.  It was held that this deduction is not  made on  the actual amount payable, but what would be  nationally payable  on  the  profits determined under  the  Full  Bench Formula  and  that if the argument on behalf of  the  labour were  to  be accepted the Tribunal would in  effect  not  be applying  the formula. Similar observations are to be  found in several other decisions  but  we need not add them here. The  question  is  whether  the  concept  of  notional   tax liability  which  was  adopted so long  was  laid  aside  by Parliament when it enacted s. 6(c) and s. 7 and replaced the concept of actual tax liability.  To answer this question we must  examine  the scheme of the Act and Sch.  II.   Broadly speaking, it can be safely said that Parliament has retained the main outlines of the Full Bench Formula in the Act.   It maintained, for instance,  the  accounting year as the unit, the principle that the employer, and where it happens to  be a company, the company and  its shareholders  and labour  as are  each entitled as contributories to the profits   to   a share therein, the deductions of certain prior charges,  the concept of gross profits etc. which were the features of the Formula.   The  principal  change  it  introduced  was   the statutory  formula  of  minimum and maximum  bonus  and  the corollary  flowing therefrom of "set on" and "set  off"  and the  doing away of rehabilitation as a prior charge  against which  labour  had  clamored long.   But  do  these  changes envisage  the  doing  away of the concept  of  notional  tax liability   which  the  Tribunals  used  to  work  out   and substituting  actual tax liability by first working out  the taxable income of, the employer under the Income Tax Act and other  Acts ? The answer of course, must be found  from  the provisions  of  the Act and not from what used  to  be  done before its enactment. Sections 4, 5, 6 and 7 together with the Schedules deal with computation  of gross profits and available surplus  out  of which  67% in cases falling under el. (a) of sec.  2(4)  and 60% in cases falling under cl. (b) of that sub-section would

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be the allocable surplus.  Under Sch. II, which applies   to establishments which are not banking companies, the starting point is the  net  profit (1) [1966] 2 L.L.J; 313. 773 shown by the employer in his P & L account.  The reason for doing  so  seems  to be that the Tribunal  is  not  expected ordinarily to reopen the P & L account, verify the  accounts from  which  it is worked out or find. out for  itself  ’the true net. profit.  Parliament was award that Tribunals which would  adjudicate disputes under the Act would be the  least efficacious  for  such a purpose, apart from the  fact  that such  enquiries  would be prolonged  and  bitter  enquiries. That  is why s. 23 was enacted to raise a presumption  about the correctness of ’the P & L account and balance-sheets of companies duly certified by auditors qualified under s.  226 of the Companies Act, 1956.  Since the P & L account   would have  taken  into account,  besides  expenditure   allowable under   the  Income  Tax  Act,  bonus  payable  to   labour, provisions   for   tax, development  rebate  or  development allowance  and  reserves, Item 2 of Sch. II  requires  these amounts to be added back.  Similarly, the amounts set out in Items  3 & 4 in Sch. II are also to be added back.   Item  5 provides for certain deductions’ such  as  capital receipts, capital  profits, profit and receipts relating to  business outside  India, income of foreign concerns from  investments outside  India  etc. It is clear from the  nature  of  these deductible  items  that they are items  in  which  generally labour  would not have made any contribution.   Having  thus arrived at the gross profits, s. 6 provides for deduction of prior charges Set out in cls. (a), (b), (c) and (d).  Clause (a) allows the deduction of depreciation admissible under s. 32 ( 1 ) of the Income Tax Act or a similar provision  under other  Acts  charging  direct taxes,  but  not  depreciation unabsorbed  in any earlier previous year by reason of  there being  no  profits or gains chargeable for that year  or  of such  profits  or  gains  being  less  than  the   allowance allowable under s. 32(2) of the Income Tax Act.  The  result is  that while making his P & L account the  employer  would deduct  both ’the depreciation allowable under s. 32(1)  as. also  the depreciation unabsorbed during the earlier  years. The  whole  of Such depreciation, however, has to  be  added back  under  item 2(b)of Sch. II while computing  the  gross profits.   Notwithstanding such adding back of  depreciation allowable under both sub-secs. 1 & 2 of s. 32 of the  Income Tax Act, the depreciation deductible under s.6(a) of the Act is the one allowed under s. 32(1), that is, the depreciation relating   to  the  accounting  year  only  and   not    the depreciation  unabsorbed  in any  earlier  accounting  year. Similar  is  the position regarding bonus  paid  during  the accounting year but which relates to the earlier  accounting years. Even in the case of an employer keeping his  accounts on mercantile basis, he would not  get  a deduction of bonus though  payable but not actually paid during the  accounting year.   He would, however, be entitled to deduct such  bonus from  his taxable profits and gains as expenditure  incurred wholly for the business.  Under Sch.  II   Item  3(a) bonus, even though paid during the accounting year, has to be 774 added  back if it is deducted in-the P & L account. The  net profit  in the P & L account: would thus not be the same  as the  available surplus worked out under ’the Act,  The  same is  the  position of losses and expenditure  relating  to  a foreign  business which though allowable under’  the  Income Tax Act have to be added back to the net profit shown in the

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P  &  L account.  As already stated  deductions  permissible under  Sch. 11 are those items in which it can be said  that labour -could have made no contribution in earning them   So far  as development rebate is concerned, s. 6(b) allows  the whole  of  such rebate allowable under the Income  ’Fax  Act and, therefore, there would be no difficulty in working  out the  development rebate under this head and the  Income  Tax Act. Coming  now  to cl. (c) of s. 6, is it  the  actual  taxable income, the direct tax on which is a prior charge, which  is to  be worked out, or the tax’ on the estimated  balance  of gross  profits after deducting depreciation and  development charges  but without deducting the bonus payable during  the year  ?   In  other words, when the  Tribunal.  reaches  the stage’ of cl. (c), does it have to assess the taxable income in accordance with the various provisions of the Income  Tax Act  just as an Income Tax Officer would do and  assess  the liability of income tax on such taxable income according  to the rates applicable during the particular accounting  year, or  should  it compute the balance of gross profits  and  as stated  above  and  apply the said rates  and  estimate  the amount  of direct tax and deduct them from the remain  gross profits?  Bonus being payable within eight months after  the close  of  the accounting year in cases.where  there  is  no dispute pending before an authority under s. ,22 of the  Act as provided by s. 19, it is hardly possible, except in  rare cases,  that assessment under the Income Tax Act  and  other such  Acts  would be completed by the time bonus has  to  be paid;  Therefore, the Tribunal would not have before it  the taxable  income  assessed by the Income Tax and  other  such officers.  If the Unions’ contention were to be right, there would be two or more parallel authorities working under this Act  and  the Income Tax Act and other such Acts  who  would have  to assess taxable income and the tax payable  thereon, before  all  of whom the employer would have  to  prove  his taxable  income. Prima facie, it would seem that  the  Bonus Act  could  not intend an enquiry into  the  actual  taxable income  worked  out  under  all  the  elaborate   provisions relating  to deductions, allowances, reliefs,  rebates  etc. provided by the Income Tax Act and other such Acts. This  is particularly  so as in each bonus dispute the  Tribunal  not equipped with the detailed knowledge of all such Acts  would have to undertake an. enquiry into the various   deductions, rebates. reliefs etc. claimable by the employer under  those Acts.    The fact that payment of bonus cannot brooke  delay without causing 775 hardship  to  labour  would seem  to  militate  against  the possibility of such prolonged enquiries. The key to the words in s. 6(c), namely, "is liable to  pay" emphasised  on  behalf  of  the  unions  and  some  of   the interveners  lies  in  the opening  words  "subject  to  the provisions of section 7" in cl. (c).  These words are  used, whether  the  tax liability is to be  calculated  on  actual taxable  income or on the notional amount worked  out  under ss. 4 and 6 and Sch. II, because the direct taxes payable by the  employer are to be calculated at the  rates  applicable during  that  year  as provided by s.  7.   That  both  such amounts cannot be the same is clear because s. 7 in  express terms  prohibits taking into account unabsorbed losses   and arrears  of  depreciation  allowable  under  s.  32(2),  the exemption  allowed  under s. 84 and  the  deduction  allowed under s. 101(1) of the Income Tax Act.  Similarly, where  an assessee  is a religious or charitable institution  and  its income  either wholly or partially, as the case may  be,  is

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exempt under the Income Tax Act, such an employer to whom s. 32  of  the Act does not apply is treated as  a  company  in which the public are substantially interested and its income is  to be assessed accordingly by the Tribunal  and  compute its  liability  for direct taxes.  Clause (c) of s.  7  does away  for  the  purposes of ss. 6  and  7,  the  distinction between the liability of an individual and a Hindu Undivided Family under the Income Tax Act and provides that the income derived by such a Hindu Undivided Family is to be treated as the  income  of that employer as an  individual.   Likewise, where profits and gains of an employer include profits  from export,  a rebate allowed under the Income Tax Act  on  such profits  is not to be taken into account while  working  out the tax. liability under s. 6(c).  Also, the rebate  allowed under any of the Acts levying direct taxes on sums spent  on development  of  an industry is also not to  be  taken  into account while computing the tax liability.  It was, however, argued  that  the  provisions  of s. 7  lay  down  the  only departure  from the Income Tax Act and that except for  that departure the Tribunal must assess the actual taxable income and arrive at the tax liability thereon at rates  prevailing during  the  accounting year in question.  In our view  this submission is  not  correct. What s. 7 really means is  that the Tribunal has to compute the direct taxes at the rates at which  the  income, gains and profits of  the  employer  are taxed  under the Income Tax Act and other such  Acts  during the accounting year in question.  That is the reason why  s. 6(c)  has the words "is liable for" and the  words  "income, gains  and profits".  These words  do. not,   however,  mean that  the  Tribunal while  computing  direct  taxes   as   a prior charge has to assess the actual taxable income and the taxes thereon.  How can the Tribunal arrive at the amount of bonus  to  be paid to labour without  first  estimating  the amount of taxes and deducting it from the gross profits  and thus ascertaining the 776 available  surplus ?  If it were to reverse the process  and first  deduct bonus and ascertain the tax amount,  it  would have  to  do so on a somewhat ad hoc  figure  thus  bringing about the same result deprecated by this Court in  decisions referred  to above. This and the other difficulties  already pointed  out must deal to the result that the Tribunal  must estimate the amount of direct taxes on the balance of  gross profits as worked out under ss. 4 & 6, but without deducting the  bonus,  then work out the quantum of taxes  thereon  at rates  applicable during that year to the income, gains  and profits  of the employer and after deducting the  amount  of taxes so worked out arrive at the available surplus. Section 6(c)  being subject to s. 7 the computation has to  be  done without  taking into account the items specified in s.  7(a) and  in  the manner prescribed by the remaining  clauses  of that section. This interpretation is commendable because: (1 )  it is consistent with the words "is liable to pay" in  s. 6(c), (2) it is in harmony with the provisions of ss. 4  and 6  and Sch. 11, and (3) it is consistent with the  intention of  Parliament  apparent from the scheme of  computation  of available  surplus  in  the Act.   The  Act  recognises  the principle  laid  down in the Full Bench  Formula  that  both labour  and capital are entitled to a share in the  profits. That is why 40 p.o. of the available surplus is left to  the capital  and interest is allowed to the employer on paid  up and  working capitals while working out the  gross  profits. Parliament  besides was or at any rate is presumed  to  have been  aware that depreciation allowed under the  Income  Tax Act would not be sufficient for rehabilitation purposes.  It

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did  away  with rehabilitation  as  a  prior  charge  partly became   there were complaints that it was  being  ill-used, but  partly also because it knew that the rebate  in  Income Tax Act on bonus paid would go to the employer with which he could recoup the depreciation which would be larger than the one allowed under s. 32 of the Income Tax Act.  In our  view it  was for that reason that it did not lay down that  bonus is  to  be  deducted before computing the  amount  on  which direct  taxes  are  to  be calculated  under  s.  6(c).   If Parliament  intended to make a departure from the rule  laid down by courts and tribunals that the bonus amount should be calculated after provision for tax was made and not  before, we would have. expected an express provision to that  effect either  in  the Act or in the Schedules. ’In  our  view  the contention urged by the Company that the tax liability is to be  worked  out by first working out the gross  profits  and deducting therefrom the prior charges under s. 6 but not the bonus payable to the employees is right. In  the  result,  the  appellant  Company  succeeds  on  the questions  of  development  rebate  and  the  provision  for gratuity amount. Its appeal on those questions is  therefore allowed  and  to  that extent the award is  set  aside.   As regards the question of depreciation 777 amount  the Tribunal will ascertain the amount afresh  after giving the parties opportunity to lead such evidence as they desire and taking that amount and the amounts of development rebate  and’ of the provision for gratuity in the  light  of this judgment, the Tribunal will adjust it award and  arrive at the quantum of bonus payable to the workmen. Appeal  by workmen is dismissed.  There will be no order  as to costs. R.K.P.S.            Appeal by Company allowed in part.                        Appeal by Workmen dismissed. 778